Pay off the mortgage or invest?
Starting in 2029, the imputed rental value will be eliminated in Switzerland. What sounds like a tax break fundamentally changes the rules of the game for mortgage strategies. Those who pay down their mortgage now will save on interest. Those who invest can get significantly more out of it. The devil is in the details.
As of January 1, 2029, the imputed rental value will be eliminated from Swiss tax law. Property owners will no longer be required to pay taxes on this notional rental income. In return, the deduction for mortgage interest will be eliminated. Deductions for maintenance and renovations on owner-occupied residential property will also be eliminated. This is a profound change to the system.
Until the end of 2028, mortgage interest remains fully deductible. This gives you time to rethink your strategy, but it’s no reason to sit idly by.
Three Decisive Questions
Whether paying off a mortgage makes sense depends on three key questions. Is there enough available capital to cover living expenses, renovations, and unforeseen expenses without restrictions? Those who tie up too much capital in real estate lose financial flexibility.
How is your total net worth structured? If a large portion of your net worth is already tied up in your own property, you run the risk of concentration risk. While real estate is stable, it is illiquid, and as the 1990s showed, it is not immune to losses in value.
Are there alternatives with higher returns?
A concrete example illustrates the difference. Someone who has paid off 300,000 francs in mortgage debt by retirement saves around 6,000 francs per year at a 2 percent interest rate. If that same 300,000 francs remains invested, a gross return of 4.5 percent over 25 years would yield an annual withdrawal of about 16,000 francs. After interest, fees, and taxes, about 10,000 francs per year still remain. The opportunity cost of premature repayment can be significant.
Alternatives to Paying Off the Mortgage
There are three options to consider. Voluntary contributions to the pension fund reduce the tax burden and increase retirement savings. This is particularly attractive for those with high taxable income. A broadly diversified securities strategy capitalizes on the long-term return opportunities of the financial markets but requires an appropriate risk tolerance. Real estate funds, on the other hand, allow for exposure to the real estate market without concentration risk and without the hassle of property management.
Strategy Over Reaction
Paying down debt can make sense if you have a high debt-to-income ratio, a low risk budget, and sufficient liquidity. However, it can also cost you opportunities and limit your flexibility. 2029 is close enough to act now and far enough away to make the decision with foresight.